How will raw material prices and other factor cost drivers influence the overall of cost of goods sold for product being sourced out of China? This outlook gives our readers a clear understanding of the key factors that drive production costs in China for hardline manufacturers. We review global demand, currency markets, metals pricing and freight and consider how the outlook for each of these drivers will influence the cost of hardlines manufactured in China. This semi-annual publication is distributed to our clients and offers a summary of our in depth research. It is used by Sertus and our clients to extract savings from more effective purchasing management and deliveries given the specific outlook for each segment covered.

1. Materials Outlook:
Factor Cost Implications for Chinese Hardlines
December 2011
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2. Sertus Research Materials Outlook
1-877-6-SERTUS Factor Cost Implications for Chinese Imports
info@sertusllc.com December 2011
2012 Global Outlook
Economists have been downgrading forecasts for 2012 large role in determining price. The combination of
almost without exception. Risks continue to be skewed low Chinese domestic inventories and a 5-month trend
to the downside (especially considering the crisis of higher imports suggests China will continue to re-
unfolding in Europe), favoring a more cautious outlook stock copper in 1H12. Yet even if demand slows, the
for next year. Should the euro break up, the supply side restraints mentioned earlier should continue
consequences to the global economy will be far more to show price support. We would not be surprised to
significant than any of the other crises of recent see Cu trading above RMB68,000 per MT in the run up
memory. All of this poses little upside for to Chinese New Year and possibly topping RMB70,000
commodities, favoring from a factor cost standpoint, a as the restocking efforts continue.
more stable inflationary environment for Chinese
goods.
Currency Markets
Through November, the RMB has appreciated against
the USD by roughly 3.7% in 2011 and is expected to
continue to appreciate through 2012 at an even brisker
pace. Risk aversion, deleveraging and global liquidity
also bode well for USD performance (certainly as it
relates to 2011). Because most all commodities are
priced in dollars, any rise in the USD (while not having
an impact in real terms), will weigh on nominal prices.
Together with expected RMB appreciation vs. USD,
this bodes well for raw material inputs for Chinese
goods.
Base Metals
Aluminium (Al): About 85% of the Al inventories
Base metals are highly cyclical and tend to sell off worldwide are tied up in inventory financing deals,
sharply during global slowdowns. While we have seen making the supply conditions much tighter than they
a modest correction already, history suggests plenty of would otherwise be. With longer dated deals offering
downside risk remains. We look at the implication of more attractive yields, the impact on supply from
each of the key base metals that form an important role inventory financing should last well into next year.
in raw material inputs for hardlines manufacturers in Aluminum prices have also been below the marginal
China. cost of production since August of this year, which also
is supportive for price as we move into 2012. On the
Copper (Cu): The global inventory pipeline for copper demand side, China’s turnabout in 2009 to become a
continues to be depleted and relief is not anticipated for net importer of Al is still driving demand. While the
at least a few more years. Global copper production auto and construction sectors have been traditionally
growth already faces several structural problems (lower strong drivers of demand in China, use in the packaging
grades, increasingly complex new projects, adverse sector is set to increase. Growing demand, combined
weather conditions and enhanced geopolitical risks). with rising power costs, government restrictions on
On the demand side, there is much uncertainty given energy-wasting industries and reduced availability of
weak manufacturing, contraction in balance sheets and funding for energy-intensive projects all favor an
limited credit availability. As the world’s largest import driven Al supply that will be on the whole
consumer, the demand scenario in China will play a supportive for price in 2012.
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3. Sertus Research Materials Outlook
1-877-6-SERTUS Factor Cost Implications for Chinese Imports
info@sertusllc.com December 2011
Steel
While customs statistics show China exports in the first
With the global economy cooling and construction
three quarters of 2011 were up over 20% year on year,
reeling from soft demand, it is expected that demand for
the trend is clearly slowing. In October, exports rose at
steel will continue to show signs of weakness.
the slowest pace in almost two years as Europe’s
Although prices bounced in September of 2011, the
deepening debt crisis has provided a strong headwind
market has since corrected and it is anticipated that as
on demand. The trend deteriorated even further in
we move into 2012, global supply will continue to
November and analysts are now calling into question
outweigh demand, keeping prices down.
their already reduced GDP numbers for 2012. It is
bound to be a very difficult year.
Freight
After climbing from lows in July not seen since 2010,
the China Containerized Freight Index (CCFI) peaked
in September and has since been on a steady decline,
now at its lowest point since 2009. Many analysts
believe shipping costs are bottoming out and that the
anticipated increase in export volume over the next
several months in the run-up to Chinese New Year,
could result in a repeat of last year’s container shortage
pushing up costs.
There is concern whether the projected growth in cargo
capacity is going to be able to meet the anticipated rise
in exports. A shortage of containers is possible although
not as severe as last year.
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